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Fitch sees risk of tobacco-style settlement for opioid makers

Fitch Ratings said opioid makers and distributors may seek to end litigation related to their alleged roles in the opioid crisis with a master settlement agreement similar to the one the big tobacco companies signed about two decades ago.

Sales of opioids are small compared to that of tobacco products but risk relating to litigation concerning the drugs is rising and aggregate cash outflows related to opioid contingencies could "exceed tens of billions of dollars," the rating agency said in an Aug. 28 press release.

The ultimate size of liabilities related to opioid lawsuits has yet to be determined and the impact on the credit ratings of U.S. drug manufacturers and distributors will vary in severity, Fitch said. A key challenge in gauging the potential losses is assessing whether plaintiffs' legal allegations and arguments will be sustained consistently across jurisdictions and defendants, the agency added.

Fitch cited recent reports indicating that Purdue Pharma LP could settle more than 2,000 lawsuits filed against the private opioid manufacturer and its owners for $10 billion to $12 billion. Drug distributors including McKesson Corp., Cardinal Health Inc. and AmerisourceBergen Corp. have also offered a $10 billion settlement to end litigation in more than 35 states.

Reckitt Benckiser Group PLC paid $1.4 billion to the U.S. Department of Justice to resolve opioid-related claims, while Allergan PLC and Endo International PLC settled cases with counties in Ohio for a total of $15 million.

The rating agency said the possibility of U.S. pharmaceutical manufacturers, distributors and others gravitating toward settling opioids cases due to headline risk is uncertain even after a judge's ruling in Oklahoma that Johnson & Johnson must pay $572 million over its role in marketing opioid painkillers in the state. That was much less than the state's demand for $17.5 billion.

Purdue Pharma and Teva Pharmaceutical Industries Ltd. settled the case in Oklahoma for a total amount of $355 million instead of going to trial as J&J did.

Oklahoma's strategy in pursuing a public nuisance claim mirrored the way big tobacco companies were charged in cases that culminated with the companies settling for billions of dollars for healthcare costs and other damages to the states, according to an Aug. 27 emailed statement by Jason Parish of law firm Buchanan Ingersoll & Rooney.

However, Fitch said it does not believe the Oklahoma ruling sets a standard for opioid lawsuits as states could employ legal approaches other than the public nuisance law, matching comments by Leerink SVB analyst Danielle Antalffy and Cowen's Joshua Jennings.

Antalffy said the Oklahoma case was unique and may not portend the outcomes in future lawsuits, while Jennings cautioned investors not to use the trial as a litmus test.

University of Kentucky College of Law Professor Richard Ausness said Aug. 27 that the opioid cases in Ohio might be more predictive than Oklahoma's because the state has a narrower public nuisance statute. Parish noted in his email that the fine assigned to J&J showed that liabilities may not be as high as anticipated.

Fitch believes that strong investment-grade companies will have the financial flexibility to manage the negative impact of potential cash outflows related to opioid contingencies by altering capital deployment policies. The rating agency noted that potential payments will vary widely based on companies' levels of promotion and involvement in the manufacturing and distribution of the drugs.

The impact on credit ratings will be based on the amount and timing of legal settlements and potential financial policy changes to deal with such settlements, among other factors, Fitch said.